S.37 – Assessee, in order to earn ‘commission income’ from Max Life Insurance Company Ltd., entered into a ‘contractual arrangement’ with Max Life whereby, assessee agreed to share 50% of ‘service tax’ payable by Max Life on such Insurance Auxiliary Services on ‘reverse charge mechanism’. Accordingly, the assessee received only ‘net commission’ from Max Life after deduction of assessee’s share in service tax liability of Max Life. Such expense with respect to 50% share in ‘service tax liability’ was disallowed by AO u/s 37 of the Act since Max Life failed to deposit amount so collected from the assessee with the Government as per law. ITAT held that the expense in question was incurred by assessee purely out of a ‘contractual arrangement’ with Max Life in order to generate ‘commission income’ and in absence of such contractual arrangement, assessee could not have secured work from Max Life. Further, such sum would not partake the character of ‘service tax liability’ since under the law, such service tax liability was that of ‘Max Life’ and not that of the ‘assessee’. Also there is no specific provision which prohibits assessee from entering into any such ‘contractual arrangement’ for sharing service tax liability and hence, such ‘contractual arrangement’ cannot be held to be an offence, as envisaged under the Explanation to S.37 of the Act. Under such facts and circumstances, disallowance made by AO u/s 37 of the Act was deleted by the ITAT.